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BANK OF THE JAMES FINANCIAL GROUP INC - Quarter Report: 2009 September (Form 10-Q)

Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 2009

 

 

BANK OF THE JAMES FINANCIAL

GROUP, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Virginia   000-50548   20-0500300

(State or other jurisdiction of

incorporation or organization)

 

(Commission

file number)

 

(I.R.S. Employer

Identification No.)

 

828 Main Street, Lynchburg, VA   24504
(Address of principal executive offices)   (Zip Code)

(434) 846-2000

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨   No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ¨  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨      Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

 

 

 


Table of Contents

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 2,990,788 shares of Common Stock, par value $2.14 per share, were outstanding at November 13, 2009.


Table of Contents

Table of Contents

 

PART I – FINANCIAL INFORMATION    1

Item 1.

   Consolidated Financial Statements    1

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    14

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    28

Item 4.

   Controls and Procedures    28
PART II – OTHER INFORMATION    28

Item 1.

   Legal Proceedings    28

Item 1A.

   Risk Factors    28

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    28

Item 3.

   Defaults Upon Senior Securities    28

Item 4.

   Submission of Matters to a Vote of Security Holders    28

Item 5.

   Other Information    28

Item 6.

   Exhibits    29
SIGNATURES    30


Table of Contents

PART I – FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Balance Sheets

(dollar amounts in thousands, except per share amounts)

 

     (unaudited)     (audited)  
     9/30/2009     12/31/2008  

Assets

    

Cash and due from banks

   $ 10,768      $ 10,584   

Federal funds sold

     19,080        5,241   
                

Total cash and cash equivalents

     29,848        15,825   
                

Securities held-to-maturity (fair value of $16,014 in 2009 and $6,039 in 2008)

     16,116        5,994   

Securities available-for-sale, at fair value

     44,809        16,136   

Restricted stock, at cost

     2,315        2,059   

Loans, net of allowance for loan losses of $5,300 in 2009 and $2,859 in 2008

     310,370        274,890   

Premises and equipment, net

     8,183        7,290   

Software, net

     265        382   

Interest receivable

     2,189        1,624   

Other real estate owned

     2,305        82   

Income taxes receivable

     1,612        1,171   

Deferred tax asset

     1,018        966   

Other assets

     7,573        2,186   
                

Total assets

   $ 426,603      $ 328,605   
                

Liabilities and Stockholders’ Equity

    

Deposits

    

Noninterest bearing demand

     39,873        35,778   

NOW, money market and savings

     230,277        127,341   

Time

     94,141        104,992   
                

Total deposits

     364,291        268,111   

Repurchase agreements

     11,080        14,339   

FHLB borrowings

     20,000        21,000   

Capital notes

     7,000        —     

Interest payable

     243        302   

Other liabilities

     258        218   
                

Total liabilities

   $ 402,872      $ 303,970   
                

Stockholders’ equity

    

Common stock $2.14 par value; authorized 10,000,000 shares; issued and outstanding 2,954,887 as of September 30, 2009 and 2,950,768 shares as of December 31, 2008

     6,323        6,014   

Additional paid-in-capital

     20,704        19,473   

Accumulated other comprehensive (loss), net

     (176     (76

Retained earnings (deficit)

     (3,120     (776
                

Total stockholders’ equity

   $ 23,731      $ 24,635   
                

Total liabilities and stockholders’ equity

   $ 426,603      $ 328,605   
                

 

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Table of Contents

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Operations

(dollar amounts in thousands, except per share amounts), unaudited

 

     For the Three Months
Ended September 30,
    For the Nine Months
Ended September 30,
 
      2009     2008     2009     2008  

Interest Income

        

Loans

   $ 4,790      $ 4,182      $ 13,448      $ 12,407   

Securities

        

US Government and agency obligations

     488        206        1,218        623   

Mortgage backed securities

     2        225        45        528   

Municipals

     21        6        52        33   

Dividends

     3        —          20        —     

Other (Corporates)

     51        105        164        292   

Federal Funds sold

     10        —          20        18   
                                

Total interest income

     5,365        4,724        14,967        13,901   
                                

Interest Expense

        

Deposits

        

NOW, money market savings

     1,337        512        3,353        1,100   

Time Deposits

     812        1,236        2,601        4,248   

Federal Funds purchased

     —          25        —          74   

FHLB borrowings

     144        149        434        326   

Repurchase agreements

     45        105        151        262   

Capital notes

     105        —          208        —     
                                

Total interest expense

     2,443        2,027        6,747        6,010   
                                

Net interest income

     2,922        2,697        8,220        7,891   

Provision for loan losses

     2,500        218        3,433        473   
                                

Net interest income after provision for loan losses

     422        2,479        4,787        7,418   
                                

Other operating income

        

Mortgage fee income

     303        272        1,043        945   

Service charges, fees, commissions

     204        245        817        818   

Other

     109        88        301        290   

Gain (loss) on sale of securities

     (149     1        (3     93   

Temporary impairment of securities

     —          (1,723     —          (1,723
                                

Total other operating income (loss)

     467        (1,117     2,158        423   

Other operating expenses

        

Salaries and employee benefits

     1,286        1,261        3,999        3,830   

Occupancy

     250        178        665        544   

Equipment

     259        249        783        718   

Supplies

     97        93        284        276   

Professional, data processing, and other outside expense

     369        312        1,056        978   

Marketing

     78        107        237        301   

Credit expense

     95        55        268        175   

Loss (gain) on sale of assets

     10        (1     21        6   

FDIC assessments

     138        42        502        126   

Other

     136        158        396        451   
                                

Total other operating expenses

     2,718        2,454        8,211        7,405   
                                

Income (loss) before income taxes

     (1,829     (1,092     (1,266     436   

Income tax expense (benefit)

     (625     213        (441     713   
                                

Net Income (loss)

   $ (1,204   $ (1,305   $ (825   $ (277
                                

Weighted average shares outstanding

     2,954,375        2,950,212        2,952,864        2,949,621   
                                

Income (loss) per common share – basic

   $ (0.41   $ (0.44   $ (0.28   $ (0.09
                                

Income (loss) per common share – diluted

   $ (0.41   $ (0.44   $ (0.28   $ (0.09
                                

 

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Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Nine months ended September 30, 2009 and 2008

(dollar amounts in thousands, except per share amounts) (unaudited)

 

     2009     2008  

Cash flows from operating activities

    

Net Income (loss)

   $ (825   $ (277

Adjustments to reconcile net income(loss) to net cash provided by (used in) operating activities

    

Depreciation

     655        559   

Net amortization and accretion of premiums and discounts on securities

     324        9   

(Gain) loss on sale of available-for sale securities

     17        (56

(Gain) on call of held to maturity securities

     (14     (37

Loss on sale of assets

     21        7   

Provision for loan losses

     3,433        473   

Stock compensation expense

     5        3   

Other than temporary impairment on securities

     —          1,723   

(Increase) decrease in interest receivable

     (565     (113

(Increase) decrease in other assets

     (2,631     (200

(Increase) decrease in income taxes receivable

     (441     —     

Increase (decrease) in income taxes payable

     —          (87

Increase (decrease) in interest payable

     (59     (56

Increase (decrease) in other liabilities

   $ 40      $ (31
                

Net cash provided by (used in) operating activities

   $ (40   $ 1,917   
                

Cash flows from investing activities

    

Purchases of securities held to maturity

   $ (16,194   $ —     

Proceeds from maturities and calls of securities held to maturity

     6,000        500   

Purchases of securities available-for sale

     (52,630     (20,904

Proceeds from maturities and calls of securities available-for sale

     9,000        6,581   

Proceeds from sale of securities available for sale

     14,550        7,268   

Purchases of bank owned life insurance

     (5,000     —     

Purchase of Federal Reserve Bank stock

     (150     (1

Purchases of Federal Home Loan Bank stock

     (106     (1,011

Origination of loans, net of principal collected

     (38,976     (35,477

Recoveries on loans charged off

     63        33   

Purchases of premises and equipment

     (1,431     (1,964

Proceeds from sale of other assets

     —          (5
                

Net cash used in investing activities

   $ (84,874   $ (44,980
                

Cash flows from financing activities

    

Net increase in deposits

   $ 96,180      $ 20,629   

Net increase (decrease) in federal funds purchased

     —          4,383   

Net increase (decrease) in repurchase agreements

     (3,259     5,390   

Net increase (decrease) in Federal Home Loan Bank advances

     (1,000     21,000   

Acquisition of common stock

     —          (59

Proceeds from exercise of stock options

     16        11   

Proceeds from sale of senior capital notes

     7,000        —     
                

Net cash provided by financing activities

   $ 98,937      $ 51,354   
                

Increase in cash and cash equivalents

     14,023        8,291   

Cash and cash equivalents at beginning of period

   $ 15,825      $ 4,314   
                

Cash and cash equivalents at end of period

   $ 29,848      $ 12,605   
                

Non cash transactions

    

Transfer of loans to foreclosed assets

   $ 2,224      $ 187   

Fair value adjustment for securities available for sale

     (151     (1,266
                

Cash transactions

    

Cash paid for interest

   $ 6,806      $ 6,066   

Cash paid for taxes

     —          809   
                

 

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Note 1 – Basis of Presentation

The unaudited consolidated financial statements have been prepared by Bank of the James Financial Group, Inc. (“Financial” or the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission. In management’s opinion the accompanying financial statements, which unless otherwise noted are unaudited, reflect all adjustments, consisting solely of normal recurring accruals, necessary for a fair presentation of the financial information as of and for the three and nine month periods ended September 30, 2009 and 2008, in conformity with accounting principles generally accepted in the United States of America. Additional information concerning the organization and business of Financial, accounting policies followed, and other related information is contained in Financial’s Annual Report on Form 10-K for the year ended December 31, 2008. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes for the year ended December 31, 2008 included in Financial’s Annual Report on Form 10-K. Results for the three and nine month periods ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.

Financial’s critical accounting policy relates to the evaluation of the allowance for loan losses which is based on management’s opinion of an amount that is adequate to absorb loss in the existing loan portfolio of Bank of the James (the “Bank”), Financial’s wholly-owned subsidiary. The allowance for loan losses is established through a provision for loan loss based on available information including the composition of the loan portfolio, historical loan losses (to the extent available due to limited history), specific impaired loans, availability and quality of collateral, age of the various portfolios, changes in local economic conditions, and loan performance and quality of the portfolio. Different assumptions used in evaluating the adequacy of the Bank’s allowance for loan losses could result in material changes in Financial’s financial condition and results of operations. The Bank’s policies with respect to the methodology for determining the allowance for loan losses involve a higher degree of complexity and require management to make subjective judgments that often require assumptions or estimates about uncertain matters. These critical policies and their assumptions are periodically reviewed with the Board of Directors.

Note 2 – Use of Estimates

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America which require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Note 3 – Earnings Per Share

All earnings per share amounts have been adjusted to reflect the 5% stock dividend paid by Financial in July 2009 as well as all prior stock dividends.

Currently, only the option shares granted to certain officers and other employees of Financial pursuant to the Amended and Restated Stock Option Plan of Financial are considered dilutive. The following is a summary of the earnings per share calculation for the three and nine months ended September 30, 2009 and 2008.

 

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     Three months ended
September 30,
    Year to date
September 30,
 
     2009     2008     2009     2008  

Net income (loss)

   $ (1,204,000   $ (1,305,000   $ (825,000   $ (277,000

Weighted average number of shares

     2,954,375        2,950,212        2,952,864        2,949,621   

Options affect of incremental shares

     —          —          —          —     
                                

Weighted average diluted shares

     2,954,375        2,950,212        2,952,864        2,949,621   
                                

Basic EPS (weighted avg shares)

   $ (0.41   $ (0.44   $ (0.28   $ (0.09
                                

Diluted EPS (including option shares)

   $ (0.41   $ (0.44   $ (0.28   $ (0.09
                                

The incremental shares associated with option shares, which were 56,249 and 118,980 for the three months ended September 30, 2009 and 2008, respectively, and 56,379 and 110,309 for the nine months ended September 30, 2009 and 2008, respectively, were not included in calculating the diluted earnings per share because the Company had a net loss for the three and nine months ended September 30, 2009 and 2008 and consequently their effect was anti-dilutive.

Note 4 – Stock Based Compensation

Accounting standards require companies to recognize the cost of employee services received in exchange for awards of equity instruments, such as stock options and restricted stock, based on the fair value of those awards at the date of grant. The current accounting standard was effective January 1, 2006 and used a modified prospective method and as such, results for prior periods have not been restated. Prior to January 1, 2006, no compensation expense was recognized by the Company for stock option grants as all such grants had an exercise price not less than fair market value on the date of grant. The Company has not issued any restricted stock.

As a result of current accounting standards, the amount of stock-based compensation included within the non-interest expense category for the three and nine months ended September 30, 2009 is $2,000 and $5,000, respectively, which had no impact on basic and diluted earnings per share for the same period.

 

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Stock option plan activity for the nine months ended September 30, 2009 is summarized below:

 

     Shares     Weighted
Average
Exercise
Price
   Weighted
Average
Remaining
Contractual
Life (in years)
   Average
Intrinsic
Value

Options outstanding, January 1, 2009

   333,923      $ 8.20      

Granted

   —          N/A      

Exercised

   (3,930     3.98      

Forfeited

   (3,596   $ 11.88      
              

Options outstanding, September 30, 2009

   326,397        8.21    3.91    $ 453,011
                        

Options exercisable, September 30, 2009

   325,557      $ 8.20    3.90    $ 453,011
                        

As of September 30, 2009 there was unrecognized compensation expense related to non-vested option awards in the amount of $5,000.

Note 5 – Stock Dividend

On May 19, 2009, the Board of Directors of the Company declared a 5% stock dividend. The stock dividend was paid on July 21, 2009 to shareholders of record as of June 16, 2009. Following the stock dividend, the number of outstanding shares increased by approximately 141,000. The dividend required a reclassification of retained earnings effective May 19, 2009 in the amount of $1,519,000. Of this amount, $301,000 was reclassified as common stock and $1,218,000 was reclassified as additional paid-in-capital. The reclassification did not change total stockholders’ equity. All per share amounts have been retroactively adjusted to reflect this dividend.

Note 6 – Fair Value Measurements

ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

 

   

Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

   

Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 

   

Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.

 

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Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:

Securities

Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Currently, all of the Company’s securities are considered to be Level 2 securities.

The following table summarizes the Company’s financial assets that were measured at fair value on a nonrecurring basis during the period.

 

          Carrying Value at September 30, 2009

Description

   Balance as of
September 30,
2009
   Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)

Available-for-sale securities

   $ 44,809    $ —      $ 44,809    $ —  

Loans held for sale

Loans held for sale are required to be measured in a lower of cost or fair value. Under ASC 820, market value is to represent fair value. Management obtains quotes or bids on all or part of these loans directly from the purchasing financial institutions. Premiums received or to be received on the quotes or bids are indicative of the fact that cost is lower than fair value. At September 30, 2009, the Company had no loans held for sale.

Impaired loans

ASC 820 applies to loans measured for impairment using the practical expedients permitted by SFAS No. 114, Accounting by Creditors for Impairment of a Loan, including impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of the collateral.

Other Real Estate Owned

Certain assets such as other real estate owned (OREO) are measured at fair value less cost to sell. We believe that the fair value component in its valuation follows the provisions of ASC 820.

The following table summarizes the Company’s impaired loans and OREO measured at fair value on a nonrecurring basis during the period.

 

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          Carrying Value at September 30, 2009

Description

   Balance as of
September 30,
2009
   Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)

Impaired loans

   $ 14,504    $ —      $ 3,288    $ 11,216

Other real estate owned

   $ 2,305    $ —      $ 2,034    $ 271

Financial Instruments

The estimated fair values, and related carrying or notional amounts, of Financial’s financial instruments are as follows:

 

     September 30, 2009    December 31, 2008
     Carrying
Amounts
   Approximate
Fair Values
   Carrying
Amounts
   Approximate
Fair Values

Financial assets

           

Cash and due from banks

   $ 10,768    $ 10,768    $ 10,584    $ 10,584

Federal funds sold

     19,080      19,080      5,241      5,241

Securities

           

Available-for-sale

     44,809      44,809      16,136      16,136

Held-to-maturity

     16,116      16,014      5,994      6,039

Restricted stock

     2,315      2,315      2,059      2,059

Loans, net

     310,370      312,263      274,890      279,151

Interest receivable

     2,189      2,189      1,624      1,624

Financial liabilities

           

Deposits

   $ 364,291    $ 362,542    $ 268,111    $ 266,216

FHLB borrowings

     20,000      20,164      21,000      21,090

Repurchase agreements

     11,080      11,080      14,339      14,339

Capital notes

     7,000      6,945      —        —  

Interest payable

     243      243      302      302

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Bank’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Bank’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment, and therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on-balance-sheet and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and

 

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liabilities that are not considered financial instruments. Significant assets that are not considered financial assets include deferred income taxes and bank premises and equipment; a significant liability that is not considered a financial liability is accrued post-retirement benefits. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

Financial assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of Financial’s financial instruments will change when interest rate levels change, and that change may be either favorable or unfavorable to the Bank. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment.

Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Bank’s overall interest rate risk.

Note 7 – Capital Notes

Financial has issued capital notes in the amount $7,000,000 (the “Notes”). The Notes bear interest at the rate of 6% per year with interest payable quarterly in arrears. The first interest payment on the Notes was due on July 1, 2009. No principal payments are due until the Notes mature on April 1, 2012. On the Maturity Date the principal and all accrued but unpaid interest on the Notes will be due and payable. For the three months ended September 30, 2009, Financial accrued interest expense of approximately $105,000.

Note 8 – Investments

The following table summarizes the Bank’s holdings for both securities held-to-maturity and securities available-for-sale as of September 30, 2009 and December 31, 2008 (amounts in thousands):

 

     September 30, 2009
     Amortized
Costs
   Gross Unrealized     Fair Value
        Gains    (Losses)    

Held to Maturity

          

US Gov’t & Agency obligations

   $ 16,116    $ 15    $ (117   $ 16,014
                            

Available-for sale

          

US Gov’t & Agency obligations

     39,454      124      (329     39,249

Mortgage-backed securities

     244      —        (8     236

Municipals

     1,879      11      (15     1,875

Other

     3,499      —        (50     3,449
                            
   $ 45,076    $ 135    $ (402   $ 44,809
                            

 

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     December 31, 2008
     Amortized
Costs
   Gross Unrealized     Fair Value
        Gains    (Losses)    

Held to Maturity

          

US Gov’t & Agency obligations

   $ 5,994    $ 45    $ —        $ 6,039
                            

Available-for sale

          

US Gov’t & Agency obligations

     6,994      243      —          7,237

Mortgage-backed securities

     5,057      27      (54     5,030

Municipals

     718      2      (26     694

Other

     3,483      25      (333     3,175
                            
   $ 16,252    $ 297    $ (413   $ 16,136
                            

The following table shows the gross unrealized losses and fair value of the Bank’s investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at the date indicated (amounts in thousands):

 

     Less than 12 months     More than 12 months     Total  

September 30, 2009

   Fair
Value
   Unrealized
(Losses)
    Fair
Value
   Unrealized
(Losses)
    Fair
Value
   Unrealized
(Losses)
 

Description of securities

               

U.S. agency obligations

   $ 37,464    $ (447   $ —      $ —        $ 37,464    $ (447

Mortgage-backed securities

     —        —          236      (8     236      (8

Municipals

     1,154      (7     232      (8     1,386      (15

Other

     —        —          2,948      (49     2,948      (49
                                             

Total temporarily impaired securities

   $ 38,618    $ (454   $ 3,416    $ (65   $ 42,034    $ (519
                                             
     Less than 12 months     More than 12 months     Total  

December 31, 2008

   Fair
Value
   Unrealized
(Losses)
    Fair
Value
   Unrealized
(Losses)
    Fair
Value
   Unrealized
(Losses)
 
               

Description of securities

               

Mortgage-backed securities

   $ 2,723    $ (42   $ 310    $ (12   $ 3,033    $ (54

Corporates

     —        —          2,023      (333     2,023      (333

Municipals

     —        —          239      (26     239      (26
                                             

Total temporarily impaired securities

   $ 2,723    $ (42   $ 2,572    $ (371   $ 5,295    $ (413
                                             

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and may do so more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) the intent of Financial, if any, to sell the security; (4) whether Financial more likely than not will be required to sell the security before recovering its cost; and (5) whether Financial does not expect to recover the security’s entire amortized cost basis (even if Financial does not intend to sell the security).

At September 30, 2009, the Company did not consider the unrealized losses as other-than-temporary losses due to the nature of the securities involved. As of September 30, 2009, the Bank owned 35 securities that were being evaluated for other than temporary impairment. Twenty-nine of these securities were S&P rated AAA, two were S&P rated AA, and four were S&P rated A. As of September 30, 2009, 29 of these securities were obligations of government sponsored entities, three were municipal bank-qualified issues, and three were issued by publicly traded United States corporations. The securities issued by publicly traded corporations are classified as “Other” in the tables set forth above.

 

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Based on the analysis performed by management as mandated by the Bank’s investment policy, management believes the default risk to be minimal. Because the Bank expects to recover the entire amortized cost basis, no declines currently are deemed to be other-than-temporary.

Note 9 – Subsequent Event

In preparing these financial statements, Financial has evaluated events and transactions for potential recognition or disclosure through November 13, 2009, the date the financial statements were issued.

Note 10 – Recent Accounting Pronouncements

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), “Business Combinations” (SFAS 141(R)) (ASC 805 Business Combinations). The Standard significantly changed the financial accounting and reporting of business combination transactions. SFAS 141(R) establishes principles for how an acquirer recognizes and measures the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) is effective for acquisition dates on or after the beginning of an entity’s first year that begins after December 15, 2008. The Company does not expect the implementation of SFAS 141(R) to have a material impact on its consolidated financial statements, at this time.

In April 2009, the FASB issued FSP FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (ASC 805 Business Combinations). FSP FAS 141(R)-1 amends and clarifies SFAS 141(R) to address application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. The FSP is effective for assets and liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company does not expect the adoption of FSP FAS 141(R)-1 to have a material impact on its consolidated financial statements.

In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (ASC 820 Fair Value Measurements and Disclosures). FSP FAS 157-4 provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity for the asset or liability have significantly decreased. The FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. FSP FAS 157-4 is effective for interim and annual periods ending after June 15, 2009, and shall be applied prospectively. Earlier adoption is permitted for periods ending after March 15, 2009. The Company does not expect the adoption of FSP FAS 157-4 to have a material impact on its consolidated financial statements.

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (ASC 825 Financial Instruments and ASC 270 Interim Reporting). FSP FAS 107-1 and APB 28-1 amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. In addition, the FSP amends APB Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in summarized financial information at interim reporting periods. The FSP is effective for interim periods ending after June 15, 2009, with earlier adoption permitted for periods ending after March 15, 2009. The Company does not expect the adoption of FSP FAS 107-1 and APB 28-1 to have a material impact on its consolidated financial statements.

 

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In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (ASC 320 Investments – Debt and Equity Securities). FSP FAS 115-2 and FAS 124-2 amends other-than-temporary impairment guidance for debt securities to make guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities. The FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. FSP FAS 115-2 and FAS 124-2 is effective for interim and annual periods ending after June 15, 2009, with earlier adoption permitted for periods ending after March 15, 2009. The Company does not expect the adoption of FSP FAS 115-2 and FAS 124-2 to have a material impact on its consolidated financial statements.

In April 2009, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 111 (SAB 111). SAB 111 amends and replaces SAB Topic 5.M. in the SAB Series entitled “Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities.” SAB 111 maintains the SEC Staff’s previous views related to equity securities and amends Topic 5.M. to exclude debt securities from its scope. The Company does not expect the implementation of SAB 111 to have a material impact on its consolidated financial statements.

In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165, “Subsequent Events” (ASC 855 Subsequent Events). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 is effective for interim and annual periods ending after June 15, 2009. The Company does not expect the adoption of SFAS 165 to have a material impact on its consolidated financial statements.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 166, “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140” (ASC 860 Transfers and Servicing). SFAS 166 provides guidance to improve the relevance, representational faithfulness, and comparability of the information that a report entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. SFAS 166 is effective for interim and annual periods beginning after November 15, 2009. The Company does not expect the adoption of SFAS 166 to have a material impact on its consolidated financial statements.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167, “Amendments to FASB Interpretation No. 46(R)” (ASC 810 Consolidation). SFAS 167 improves financial reporting by enterprises involved with variable interest entities. SFAS 167 is effective for interim and annual periods beginning after November 15, 2009. Early adoption is prohibited. The Company does not expect the adoption of SFAS 167 to have a material impact on its consolidated financial statements.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – replacement of FASB Statement No. 162” (ASC 105 Generally Accepted Accounting Principles). SFAS 168 establishes the FASB Accounting Standards Codification which will become the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. SFAS 168 is effective immediately. The Company does not expect the adoption of SFAS 168 to have a material impact on its consolidated financial statements.

In June 2009, the FASB issued EITF Issue No. 09-1, “Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing” (ASC 470 Debt). EITF Issue No. 09-1 clarifies how an entity should account for an own-share lending arrangement that is entered into in contemplation of a convertible debt offering. EITF Issue No. 09-1 is effective for arrangements entered into on or after June 15, 2009. Early adoption is prohibited. The Company does not expect the adoption of EITF Issue No. 09-1 to have a material impact on its consolidated financial statements.

 

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In June 2009, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 112 (SAB 112). SAB 112 revises or rescinds portions of the interpretative guidance included in the codification of SABs in order to make the interpretive guidance consistent with current U.S. GAAP. The Company does not expect the adoption of SAB 112 to have a material impact on its consolidated financial statements.

In August 2009, the FASB issued Accounting Standards Update No. 2009-05 (ASU 2009-05), “Fair Value Measurements and Disclosures (Topic 820) – Measuring Liabilities at Fair Value.” ASU 2009-05 amends Subtopic 820-10, “Fair Value Measurements and Disclosures – Overall,” and provides clarification for the fair value measurement of liabilities. ASU 2009-05 is effective for the first reporting period including interim period beginning after issuance. The Company does not expect the adoption of ASU 2009-05 to have a material impact on its consolidated financial statements.

In September 2009, the FASB issued Accounting Standards Update No. 2009-12 (ASU 2009-12), “Fair Value Measurements and Disclosures (Topic 820): Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent).” ASU 2009-12 provides guidance on estimating the fair value of alternative investments. ASU 2009-12 is effective for interim and annual periods ending after December 15, 2009. The Company does not expect the adoption of ASU 2009-12 to have a material impact on its consolidated financial statements.

In October 2009, the FASB issued Accounting Standards Update No. 2009-15 (ASU 2009-15), “Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing.” ASU 2009-15 amends Subtopic 470-20 to expand accounting and reporting guidance for own-share lending arrangements issued in contemplation of convertible debt issuance. ASU 2009-15 is effective for fiscal years beginning on or after December 15, 2009 and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The Company does not expect the adoption of ASU 2009-15 to have a material impact on its consolidated financial statements.

In October 2009, the Securities and Exchange Commission issued Release No. 33-99072, “Internal Control over Financial Reporting in Exchange Act Periodic Reports of Non-Accelerated Filers.” Release No. 33-99072 delays the requirement for non-accelerated filers to include an attestation report of their independent auditor on internal control over financial reporting with their annual report until the fiscal year ending on or after June 15, 2010.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report contains statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. The words “believe,” “estimate,” “expect,” “intend,” “anticipate,” “plan” and similar expressions and variations thereof identify certain of such forward-looking statements which speak only as of the dates on which they were made. Bank of the James Financial Group, Inc. undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those indicated in the forward-looking statements as a result of various factors. Factors that could cause actual results to differ from the results discussed in the forward-looking statements include, but are not limited to: economic conditions (both generally and more specifically in the markets in which we operate); competition for our customers from other providers of financial services; government legislation and regulation (which changes from time to time and over which we have no control); changes in the value of real estate securing loans made by the Bank; changes in interest rates; and material unforeseen changes in the liquidity, results of operations, or financial condition of our customers. Other risks, uncertainties and factors could cause our actual results to differ materially from those projected in any forward-looking statements we make.

GENERAL

Critical Accounting Policies

Bank of the James Financial Group, Inc.’s (“Financial”) financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The financial information contained within our statements is, to a significant extent, based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. We use historical loss ratios as one factor in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ significantly from the historical factors that we use in estimating risk. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change.

The allowance for loan losses is management’s estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting: (i) SFAS No. 5, “Accounting for Contingencies,” which requires that losses be accrued when they are probable of occurring and are reasonably estimable and (ii) SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” which requires that losses on impaired loans be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. See “Management Discussion and Analysis ‘Results of Operations – Allowance for Loan Losses and Loan Loss Reserve’” below for further discussion of the allowance for loan losses.

Overview

Financial is a bank holding company with its headquarters in Lynchburg, Virginia. Financial was incorporated at the direction of Bank of the James (the “Bank”) on October 3, 2003 to serve as a bank holding company of the Bank. Financial had no business until January 1, 2004 when it acquired the

 

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common stock of the Bank through a statutory share exchange on a one-for-one basis. In addition to the Bank, Financial wholly-owns BOTJ Investment Group, Inc. (“Investment Group”) through which we offer brokerage, fixed and variable annuity products, and related services to the public through a third party broker-dealer. The Bank also wholly-owns BOTJ Insurance, Inc. (“BOTJ Insurance”) through which we act as an agent for insurance and annuity products. The Bank (and BOTJ Insurance) and the Investment Group are our only subsidiaries and primary assets. Financial conducts its business through the following lines: community banking through the Bank, insurance agency services through BOTJ Insurance, mortgage origination through the Mortgage Division of the Bank, and securities brokerage services through Investment Group.

Financial declared a 5% stock dividend on May 19, 2009 which was paid on July 21, 2009 to shareholders of record on June 16, 2009.

The Bank is a Virginia banking corporation headquartered in Lynchburg, Virginia. The Bank was incorporated under the laws of the Commonwealth of Virginia as a state chartered bank in 1998 and began banking operations in July 1999. The Bank was organized to engage in general retail and commercial banking business. The Bank is a community-oriented financial institution that provides varied banking services to individuals, small and medium-sized businesses, and professional concerns in the Central Virginia, Region 2000 area, which encompasses the seven jurisdictions of the Town of Altavista, Amherst County, Appomattox County, the City of Bedford, Bedford County, Campbell County, and the City of Lynchburg. The Bank strives to provide its customers with products comparable to statewide regional banks located in its market area, while maintaining the prompt response time and level of service of a community bank. Management believes this operating strategy has particular appeal in the Bank’s market area.

The Bank’s principal office is located at 828 Main Street, Lynchburg, Virginia 24504 and its telephone number is (434) 846-2000. The Bank also maintains a website at www.bankofthejames.com.

Investment Group was incorporated under the laws of the Commonwealth of Virginia in 2006. In April 2006, Investment Group began providing securities brokerage services to Bank customers and others. Investment Group provides the services through an agreement with Community Bankers’ Securities, LLC (“CB Securities”), a registered broker-dealer. Under this agreement, CB Securities will operate service centers in one or more branches of the Bank. As of the date hereof, Investment Group’s only center is located in the Church Street office. All centers will be staffed by a dual employee of Investment Group and CB Securities. Investment Group receives commissions on transactions generated and in some cases ongoing management fees such as mutual fund 12b-1 fees. As of the date hereof, Investment Group has been conducting business for approximately three years and its financial impact on the consolidated financials of the Company has been minimal. In addition, Investment Group has purchased 4.96% of CBS Holdings, LLC for $30,000. CBS Holdings is owned by approximately 11 financial institutions.

BOTJ Insurance was incorporated under the laws of the Commonwealth of Virginia in 2008. In September 2008, BOTJ Insurance began offering its services to the public from space in the Main Street Branch. Currently BOTJ Insurance is a stand-alone agency with no employees.

Our operating results depend primarily upon the Bank’s net interest income, which is determined by the difference between (i) interest and dividend income on earning assets, which consist primarily of loans, investment securities and other investments, and (ii) interest expense on interest-bearing liabilities, which consist principally of deposits and other borrowings. The Bank’s net income also is affected by its provision for loan losses, as well as the level of its non-interest income, including loan fees and service charges, and its non-interest expenses, including salaries and employee benefits, occupancy expense, data processing expenses, Federal Deposit Insurance Corporation premiums, expense in complying with the Sarbanes-Oxley Act of 2002, miscellaneous other expenses, franchise taxes, and income taxes.

 

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The Bank intends to enhance its profitability by increasing its market share in the Region 2000 area, providing additional services to its customers, and controlling costs.

The Bank now services its banking customers through nine branch locations in the Region 2000 area.

On June 15, 2009, the Bank relocated its temporary branch (opened in November 2008) located at 815 Main St. in the Town of Altavista, Virginia to a new full-service branch located at 1110 Main Street in Altavista.

In addition to this recently-opened branch, the Bank also serves its customers through the following eight full service offices:

 

   

The main office located at 828 Main Street in Lynchburg (opened October 2004) (the “Main Street Office”),

 

   

A branch located at 615 Church Street in Lynchburg (the “Church Street Branch”) (opened July 1999),

 

   

A branch located at 5204 Fort Avenue in Lynchburg (the “Fort Avenue Branch”) (opened November 2000),

 

   

A branch located on South Amherst Highway in Amherst County (the “Madison Heights Branch”) (opened June 2002),

 

   

A branch located at 17000 Forest Road in Forest (the “Forest Branch”) (opened February 2005),

 

   

A branch located at 4935 Boonsboro Road, Suites C and D in Lynchburg (the “Boonsboro Branch”) (opened April 2006),

 

   

A branch located at 164 South Main Street, Amherst, Virginia (the “Amherst Branch”) (opened January 2007), and

 

   

A branch located at 1405 Ole Dominion Boulevard in the City of Bedford, Virginia, located off of Independence Boulevard (opened October 2008) (the “Bedford Branch”).

In addition, the Bank, through its mortgage division, originates residential mortgage loans through two offices—one located at the Forest Branch and the other located at 14662 Moneta Rd., Suite A in Moneta (opened July 2005).

Investment Group operates primarily out of its office located at the Church Street Branch.

The Bank continuously evaluates areas located within Region 2000 to identify additional viable branch locations. Based on this ongoing evaluation, the Bank may acquire one or more additional suitable sites.

Subject to regulatory approval, the Bank anticipates opening additional branches during the next two fiscal years. Although numerous factors could influence the Bank’s expansion plans, the Bank intends to open a location on property that it previously purchased at the intersection of Turnpike and Timberlake Roads, Campbell County, Virginia. The Bank has determined that the existing structures on the Timberlake site are insufficient for use as a bank branch. The Bank does not anticipate requesting approval to open a branch at this location prior to 2011. The Bank estimates that the cost of improvements, furniture, fixtures, and equipment necessary to upfit this property will be between $1,300,000 and $1,700,000.

 

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On September 10, 2008, the Bank entered into a lease of certain real property located at 1152 Hendricks Store Road, Moneta, Virginia. Presently, the Bank does not conduct business at this location but is likely to relocate its Moneta mortgage office to this location.

Although the Bank cannot predict with certainty the financial impact of each new branch, management generally anticipates that each new branch will become profitable within 12 to 18 months of operation.

Subject to terms acceptable to the Bank, the Bank may consider entering into sale-leaseback arrangements for one or more of its branches.

Except as set forth herein, the Bank does not expect to purchase any significant property or equipment in the upcoming 12 months. Future branch openings are subject to regulatory approval.

OFF-BALANCE SHEET ARRANGEMENTS

The Bank is a party to various financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the balance sheets and could impact the overall liquidity and capital resources to the extent customers accept and or use these commitments.

The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. A summary of the Bank’s commitments is as follows:

 

     September 30,
2009

(in thousands)

Commitments to extend credit

   $ 47,007

Letters of Credit

     1,989
      

Total

   $ 48,996
      

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on the Bank’s credit evaluation of the customer.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Collateral is required in instances that the Bank deems necessary.

 

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SUMMARY OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion represents management’s discussion and analysis of the financial condition of Financial as of September 30, 2009 and December 31, 2008 and the results of operations of Financial for the three and nine months ended September 30, 2009 and 2008. This discussion should be read in conjunction with the financial statements included elsewhere herein and should be read in the context of the length of time for which the Bank has been operating.

All financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.

Financial Condition Summary

September 30, 2009 as Compared to December 31, 2008

Total assets were $426,603,000 on September 30, 2009 compared with $328,605,000 at December 31, 2008, an increase of 29.82%. The increase in total assets is due primarily to an increase in deposits which were invested in fixed income investments, loans, and other interest earning assets.

Total deposits grew from $268,111,000 for the year ended December 31, 2008 to $364,291,000 on September 30, 2009, an increase of 35.87%, driven in large part by increased deposits at the Altavista, Bedford, Boonsboro, and Forest Branches. The balance of non-FDIC insured sweep accounts (repurchase agreements) decreased to $11,080,000 on September 30, 2009 from $14,339,000 on December 31, 2008 in large part because of a decrease in interest rates paid on these accounts.

To complement deposits in funding asset growth and due to the attractive rates on these funds, the Bank has funded past asset growth with short to medium term advances from the Federal Home Loan Bank of Atlanta (FHLBA). As of September 30, 2009, the principal balance of FHLBA borrowings was $20,000,000 as compared to $21,000,000 on December 31, 2008. On April 15, 2009, $1,000,000 of the advances matured and was repaid to FHLBA, which accounts for the decrease. An additional $10,000,000 in FHLBA advances will mature on February 5, 2010. Because of recent deposit growth, although the Bank likely will not need renew this advance to fund growth, Management may renew the advance if rates are favorable.

Total loans increased to $315,670,000 on September 30, 2009 from $277,749,000 on December 31, 2008. Loans, net of unearned income and allowance, increased to $310,370,000 on September 30, 2009 from $274,890,000 on December 31, 2008, an increase of 12.91%. The following summarizes the position of the Bank’s loan portfolio as of the dates indicated by dollar amount and percentages (dollar amounts in thousands):

 

     September 30, 2009     December 31, 2008     September 30, 2008  
     Amount    Percentage     Amount    Percentage     Amount    Percentage  

Commercial

   $ 60,901    19.29   $ 52,842    19.03   $ 49,331    18.87

Real estate construction

     35,131    11.13     43,507    15.66     43,233    16.54

Real estate mortgage

     161,916    51.29     136,850    49.27     129,077    49.38

Consumer

     55,568    17.60     43,220    15.56     38,074    14.57

Other

     2,154    0.68     1,330    0.48     1,684    0.64
                                       

Total loans

   $ 315,670    100.00   $ 277,749    100.00   $ 261,399    100.00
                                       

Total nonperforming assets, which consist of non-accrual loans and other real estate owned (“OREO”) increased to $6,999,000 on September 30, 2009 from $3,940,000 on December 31, 2008. Non-accrual loans increased to $4,694,000 on September 30, 2009 from $3,859,000 on December 31, 2008. As discussed in more detail below under “Results of Operations—Allowance for Loan Losses”, management has provided for the anticipated losses on these loans in the loan loss reserve and consequently does not anticipate that they will have a material impact on the financial condition of the Bank.

 

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OREO represents real property owned by the Bank either through purchase at foreclosure or received from the borrower through a deed in lieu of foreclosure. On December 31, 2008, the Bank was carrying one OREO property on its books at a value of $82,000. As of September 30, 2009, the Bank was carrying OREO properties on its books at a value of $2,305,000, of which $1,609,000 was due to the purchase of a partially-developed commercial property, which the Bank purchased at foreclosure in January. Because of economic conditions, although these properties are not actively being marketed, they are available-for sale. Since the end of the third quarter, the Bank has determined to hold the above-referenced partially-developed commercial property for future branch expansion or as development property, and in connection with this determination has reclassified this property accordingly, leaving an OREO balance of approximately $696,000 as of the date hereof.

The following tables set forth information regarding impaired and non-accrual loans as of September 30, 2009 and December 31, 2008:

 

     Impaired & Non-Accrual Loans
     (dollars in thousands)
     September 30, 2009    December 31, 2008

Impaired loans without a valuation allowance

   $ 27,119    $ 8,006

Impaired loans with a valuation allowance

     18,082      10,375
             

Total impaired loans

   $ 45,201    $ 18,381
             

Valuation allowance related to impaired loans

   $ 3,578    $ 1,441

Total non-accrual loans

   $ 4,694    $ 3,859

Total loans past due ninety days or more and still accruing

   $ —      $ —  
     Average Investment in Impaired Loans
     (dollars in thousands)
     Period Ended
     September 30, 2009    December 31, 2008

Average investment in impaired loans

   $ 27,396    $ 15,703
             

Interest income recognized on impaired loans

   $ 1,409    $ 860
             

Interest income recognized on a cash basis on impaired loans

   $ 1,391    $ 786
             

The increases in impaired loans as reflected in the above table was a result of the recent evaluation of the entire loan portfolio in light of current economic conditions and the value of the underlying collateral securing loans. The result of the evaluation led management to downgrade certain relationships. Some of these downgrades required an increase to the allowance for loan losses which was funded through the $2,500,000 provision in the third quarter. The allowance for loan losses is discussed in more detail below.

No non-accrual loans were excluded from impaired loan disclosure under current accounting rules at September 30, 2009 and December 31, 2008. If interest on these loans had been accrued, such income would have approximated $1,521,000 and $242,000, through September 30, 2009 and December 31, 2008, respectively. Loan payments received on non-accrual loans are first applied to principal. When a loan is placed on non-accrual status there are several negative implications. First, all interest accrued but unpaid at the time of the classification is reversed and deducted from the interest income totals for the

 

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Bank. Second, accruals of interest are discontinued until it becomes certain that both principal and interest can be repaid. Third, there may be actual losses that necessitate additional provisions for credit losses charged against earnings. These loans were included in the non-performing loan totals listed above.

Cash and cash equivalents increased to $29,848,000 on September 30, 2009 from $15,825,000 on December 31, 2008. Cash and cash equivalents consist of cash due from correspondents, cash in vault, and overnight investments (including federal funds sold). This increase is due in part to the proceeds from the private placement discussed below, routine fluctuations in deposits, including fluctuations in transactional accounts and professional settlement accounts, both of which are subject to fluctuations, and will contribute to variations in cash and cash equivalents and the Bank does not consider this change to be material.

Securities held-to-maturity increased to $16,116,000 on September 30, 2009 from $5,994,000 on December 31, 2008. Securities available-for-sale increased to $44,809,000 on September 30, 2009 from $16,136,000 on December 31, 2008. During the nine months ended September 30, 2009 the Bank has received proceeds from maturities and/or calls of securities-available-for sale totaling $9,000,000 and has received proceeds from sale of securities available-for sale totaling $14,550,000. The Bank purchased $52,630,000 in securities available-for sale during the same period. The increase from December 31, 2008 in both securities held-to-maturity and securities available-for-sale was primarily due to the investment of surplus funds, primarily from the increase in deposits, in longer term, higher yielding securities.

Financial’s investment in FHLBA stock totaled $1,537,000 at September 30, 2009. FLHBA stock is generally viewed as a long-term investment and because there is no market for the stock other than other Federal Home Loan Banks or member institutions, FHLBA stock is viewed as a restricted security. Therefore, when evaluating FHLBA stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. Despite the FHLBA’s temporary suspension of repurchase of excess capital stock in 2009, Financial does not consider this investment to be other-than-temporarily impaired at September 30, 2009 and no impairment has been recognized.

At September 30, 2009, Financial had liquid assets of approximately $74,657,000 in the form of cash and available-for-sale investments. Management believes that liquid assets were adequate at September 30, 2009. Management anticipates that additional liquidity will be provided by the growth in deposit accounts and loan repayments at the Bank. In addition, the Bank has the ability to purchase federal funds on the open market and borrow from the Federal Reserve Bank’s discount window, if necessary.

In connection with a private placement of unregistered debt securities, Financial issued capital notes in the amount $7,000,000 (the “Notes”). Financial issued $6,180,000 of the Notes in the quarter ended March 31, 2009 and the remaining $820,000 of the Notes was issued in April 2009. The Notes bear interest at the rate of 6% per year with interest payable quarterly in arrears. The first interest payment on the Notes was due on July 1, 2009. No principal payments are due until the Notes mature on April 1, 2012 (the “Maturity Date”). On the Maturity Date the principal and all accrued but unpaid interest on the Notes will be due and payable.

Year-to-date, Financial has contributed $6,000,000 from the proceeds of the Notes to the Bank as additional equity capital. Financial has retained the balance of the proceeds, approximately $1,000,000, at the holding company level. Management intends to use the funds held at the holding company level for the purposes of servicing the interest payments due on the Notes and general corporate purposes. If necessary to finance additional growth, Financial may contribute additional funds to the Bank as additional equity capital. During the three months ended September 30, 2009, Financial made interest payment on the Notes totaling $105,000.

 

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Management is not aware of any trends, events or uncertainties that are reasonably likely to have a material negative impact on Financial’s short-term or long-term liquidity.

At September 30, 2009, the Bank had a leverage ratio of 7.13%, a Tier 1 risk-based capital ratio of 9.36% and a total risk-based capital ratio of 10.62%. As of September 30, 2009 and December 31, 2008 the Bank’s regulatory capital levels exceeded those established for well-capitalized institutions. The following table sets forth the minimum capital requirements and the Bank’s capital position as of September 30, 2009 and December 31, 2008:

 

Analysis of Capital (in 000’s)

   September 30,
2009
   December 31,
2008

Tier 1 Capital:

     

Common stock

   $ 3,743    $ 3,743

Surplus

     19,321      13,317

Retained earnings

     6,481      7,195
             

Total Tier 1 capital

   $ 29,545    $ 24,255
             

Tier 2 Capital:

     

Allowance for loan losses

     3,962      2,859
             

Total Tier 2 Capital:

     3,962      2,859
             

Total risk-based capital

   $ 33,507    $ 27,114
             

Risk weighted assets

   $ 315,612    $ 270,451

Average total assets

   $ 414,112    $ 324,386

 

     Actual     Regulatory Benchmarks  
     September 30,
2009
    December 31,
2008
    For Capital
Adequacy
Purposes
    For Well
Capitalized
Purposes
 

Capital Ratios:

        

Tier 1 capital to average total assets ratio (leverage ratio)

   7.13   7.48   4.00   5.00

Tier 1 risk based capital ratio

   9.36   8.97   4.00   6.00

Total risk-based capital ratio

   10.62   10.03   8.00   10.00

The above tables set forth the capital position and analysis for the Bank only. Because total assets on a consolidated basis are less than $500,000,000, Financial is not subject to the consolidated capital requirements imposed by the Bank Holding Company Act. Consequently, Financial does not calculate its financial ratios on a consolidated basis. If calculated, the capital ratios for the Company on a consolidated basis would no longer be comparable to the capital ratios of the Bank because the proceeds of the private placement do not qualify as equity capital on a consolidated basis.

 

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Results of Operations

Comparison of the Three and Nine Months Ended September 30, 2009 and 2008

Earnings Summary

Financial had a net loss for the three and nine months ended September 30, 2009 of $1,204,000 and $825,000, respectively, compared to a net loss of $1,305,000 and $277,000, respectively for the comparable periods in 2008. The basic and diluted loss per common share for the three and nine months ended September 30, 2009 was $0.41 and $0.28, respectively compared with $0.44 and $0.09 for the same periods in 2008. All earnings per share amounts have been adjusted to reflect the 5% stock dividend paid by Financial in July 2009 as well as all prior stock dividends.

The net loss for the three and nine months ended September 30, 2009 resulted solely from a non-cash charge to increase the allowance for loan loss reserve. In comparison the loss in 2008 resulted primarily from a non-cash other-than-temporary impairment (“OTTI”) charge related to Financials then-unrealized loss of $1,723,000 related to the Company’s investments in preferred stock of Federal National Mortgage Association (the “GSE”). As discussed in more detail under “Results of Operations - Non Interest Income,” this OTTI charge became a realized loss during the fourth quarter of 2008.

These operating results represent an annualized negative return on stockholders’ equity of 18.42% and 4.31% for the three and nine months ended September 30, 2009, compared with an annualized negative return of 20.93% and 1.50% in the same periods in 2008. The Company had an annualized negative return on average assets for the three and nine months ended September 30, 2009 of 1.16% and 0.28% respectively, compared with an annualized negative return of 1.67% and 0.13% for the same periods in 2008.

Interest Income, Interest Expense, and Net Interest Income

Interest income increased to $5,365,000 and $14,967,000 for the three and nine months ended September 30, 2009 from $4,724,000 and $13,901,000 for the same periods in 2008, an increase of 13.57% and 7.67% from the same periods in 2008. Despite a decrease in the rate on total average earning assets from 6.36% and 6.68% for the three and nine month periods ended September 30, 2008 to 5.51% and 5.57% for the three and nine months ended September 30, 2009, interest income increased due in part to an increase in the balance of interest earning assets. Although management cannot be certain, management expects that interest rates will remain near historic lows for the remainder of 2009 and may continue to negatively impact our interest income.

Despite a decrease in interest rates, interest expense increased to $2,443,000 and $6,747,000 for the three and nine months ended September 30, 2009 from $2,027,000 and $6,010,000 from the same periods in 2008, an increase of 20.52% and 12.26%, respectively. The increase for the three and nine months ended September 30, 2009 was primarily attributable to a significant increase in the balance of interest bearing liabilities (discussed under “Financial Condition Summary” above), including the “2010 Savings Account,” an account that pays customers a minimum annual percentage yield of 3.00% through February 2010.

The fundamental source of the Bank’s revenue is net interest income, which is determined by the difference between (i) interest and dividend income on interest earning assets, which consist primarily of loans, investment securities and other investments, and (ii) interest expense on interest-bearing liabilities, which consist principally of deposits and other borrowings. Net interest income for the three and nine months ended September 30, 2009 was $2,922,000 and $8,220,000 compared with $2,697,000 and $7,891,000 for the same periods in 2008. The net interest margin decreased to 3.00% and 3.06% for the three and nine months ended September 30, 2009 from 3.63% and 3.79% in the same periods a year ago. The decrease in net interest income for the three and nine months ended September 30, 2009 as compared with the comparable three and nine months in 2008 was due to the increase in interest-bearing liabilities.

Financial’s net interest margin analysis and average balance sheets are shown in Schedule I on page 26.

 

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Non-Interest Income

Non-interest income, which is comprised primarily of fees and charges on transactional deposit accounts, mortgage loan origination fees, commissions on sales of investments and the Bank’s ownership interest in a title insurance agency, decreased to $616,000 (exclusive of ($149,000) on the (loss) on sale of securities) for the three months ended September 30, 2009 from $605,000 (exclusive of $1,000 on the gain on sale of securities and $1,723,000 other-than-temporary impairment of securities) for the comparable period in 2008. For the nine months ended September 30, 2009, non-interest income increased to $2,161,000 (exclusive of ($3,000) on the (loss) on sale of securities) from $2,053,000 (exclusive of $93,000 on the gain on sale of securities and $1,723,000 other-than-temporary impairment of securities) for the comparable period in 2008. These increases for the three and nine months ended September 30, 2009 as compared to the same periods last year were due primarily to increases in customer service fees, an increase in debit card fees, commissions earned by Investment Group, and an increase in the amount and volume of mortgages originated by the Mortgage Division.

In the quarter ended September 30, 2008, the Bank recognized an other-than-temporary impairment (“OTTI”) charge of $1,723,000 related to preferred stock of Federal National Mortgage Association (the “GSE”). The value of this stock decreased sharply in September 2008 after the announcement that the GSE was suspending dividend payments and was being placed into conservatorship of the Federal Housing Finance Agency. On December 29, 2008, the Bank sold its preferred stock and recognized a total loss of $1,833,000 (inclusive of the amount of the OTTI). A provision of the Emergency Economic Stabilization Act enabled the Company to realize a tax benefit of approximately $623,000 for the year ended December 31, 2008, which had the result of lowering the total loss on the sale of the preferred stock to $1,210,000.

The Bank, through the Mortgage Division, originates both conforming and non-conforming consumer residential mortgage loans in the Region 2000 area. As part of the Bank’s overall risk management strategy, all of the loans originated and closed by the Mortgage Division are presold to major national mortgage banking or financial institutions. The Mortgage Division assumes no credit or interest rate risk on these mortgages. In July, 2005, the Mortgage Division opened its second mortgage origination office. This office is located in Moneta and was opened to serve the Smith Mountain Lake market. The Bank anticipates that the Moneta office will contribute minimal non-interest income during 2009.

Management anticipates that residential mortgage rates will remain near the current historic lows for the remainder of 2009. Management expects that low rates coupled with the Mortgage Division’s reputation in Region 2000 will allow us to continue to grow revenue at the Mortgage Division. In addition, loan origination has increased in part due to the temporary tax credit available to qualified first-time home buyers. The credit is scheduled to expire on April 30, 2010. Management believes the availability of this credit will continue to have a positive impact on loan volume.

We anticipate that Investment Group and the Mortgage Division will continue to contribute additional non-interest income in the remainder of 2009.

In September, 2008, the Company began operating BOTJ Insurance, Inc. (“BOTJ Insurance”), a wholly-owned subsidiary of the Bank. Management does not expect BOTJ Insurance to have a material impact on non-interest income in the foreseeable future.

Non-Interest Expense

Non-interest expense for the three and nine months ended September 30, 2009 increased to $2,718,000 and $8,211,000 from $2,454,000 and $7,405,000 for the comparable periods in 2008. These 10.8% and 10.9% increases in non-interest expense from the comparable periods in 2008 can be attributed to increased occupancy expenses and an increase in the FDIC assessment.

Total personnel expense was $1,286,000 and $3,999,000 for the three and nine month periods ended September 30, 2009 as compared to $1,261,000 and $3,830,000 for the same periods in 2008. Compensation for some employees of the Mortgage Division and Investment Group is commission-based

 

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and therefore subject to fluctuation. In addition, the application of current accounting rules had the effect of reducing personnel expense. Current accounting rules require the incremental direct costs of originating and closing a loan to be deferred and amortized over the life of the loan adjusting the net yield. This deferral of loan costs had the effect of reducing salary expense by $304,000 and $903,000 for the three and nine months ended September 30, 2009 as compared with $207,000 and $595,000 for the same periods in 2008. After adding back the cost deferral under current accounting rules, our total salary and benefit expense increased by $122,000 and $477,000 for the three and nine month periods ended September 30, 2009 from the comparable periods in 2008.

The Bank also had increases in depreciation expense and other operating expenses, all of which are related to the growth of the Bank.

During the quarter ended September 30, 2009, the regular FDIC Assessment expense increased to $138,000 and $318,000 from $42,000 and $126,000 for the three and nine months ended September 30, 2009 and 2008, respectively.” Regular quarterly FDIC Assessment payments have increased in large part because of i) FDIC coverage on accounts has increased from $100,000 to $250,000; and ii) the FDIC is charging additional premiums for participation in the Transactional Account Guarantee Program. (TAGP).

Allowance for Loan Losses

The provision to the allowance for loan losses is charged to earnings to bring the total allowance to a level deemed appropriate by management and is based upon many factors, including calculations of specific impairment of certain loans, general economic conditions, actual and expected credit losses, loan performance measures, historical trends and specific conditions of the individual borrower. Based on the application of the loan loss calculation, the Bank provided $2,500,000 and $3,433,000 to the allowance for loan loss for the three and nine months ended September 30, 2009 compared to provision of $218,000 and $473,000 for the comparable periods in 2008.

The increase in the loan loss reserve was due to the following two factors:

 

   

Management adjusted the unallocated portion of the loan loss reserve to account for current economic factors. The results of the adjustment required management to increase the loan loss provision.

 

   

In light of the current economic environment, management continued its ongoing assessment of specific impairment in the Bank’s loan portfolio. The results of this assessment required management to increase the loan loss provision.

Management believes that the current allowance for loan loss of $5,300,000 (or 1.68% of total loans) at September 30, 2009 is adequate.

 

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Table of Contents

The following sets forth the reconciliation of the allowance for loan loss:

 

     Three months ended
September 30,
(in thousands)
    Nine months ended
September 30,
(in thousands)
 
     2009     2008     2009     2008  

Balance, beginning of period

   $ 3,323      $ 2,275      $ 2,859      $ 2,146   

Provision for loan losses

     2,500        218        3,433        473   

Loans charged off

     (555     (97     (1,055     (246

Recoveries of loans charged off

     32        10        63        34   
                                

Net Charge Offs

     (523     (87     (992     (212
                                

Balance, end of period

   $ 5,300      $ 2,406      $ 5,300      $ 2,406   
                                

Net charge offs increased from $87,000 and $212,000 for three and nine months ended September 30, 2008 to $523,000 and $992,000 for the same periods in 2009. Charged off loans, which are loans that management deems uncollectible, are written against the loan loss reserve and constitute a realized loss. While a charged-off loan may subsequently be collected, such recoveries generally are realized over an extended period of time.

Income Taxes

For the three months ended September 30, 2009, Financial had an income tax benefit of $625,000. Because of taxes receivable from the IRS, Financial made no income tax payment during the quarter ended September 30, 2009.

Legislation

The FDIC imposed an emergency special assessment of 5 basis points on all insured financial institutions, based on assets minus Tier 1 capital as of September 30, 2009. This special assessment of $184,000 was accrued and expensed in the second quarter but paid by us on September 30, 2009. The FDIC has indicated that rather than an additional special assessment of up to 5 basis points by year end, it is likely to require insured financial institutions to prepay three years of regular FDIC premiums to recapitalize the insurance fund. Because we anticipate that these prepayments will be amortized over a three year period, the prepayment will not have a material effect on the Bank.

 

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Table of Contents

Schedule I

Net Interest Margin Analysis

Average Balance Sheets

For the Quarter Ended September 30, 2009 and 2008

 

     2009     2008  
     Average
Balance
Sheet
    Interest
Income/
Expense
   Average
Rates
Earned/Paid
    Average
Balance
Sheet
    Interest
Income/
Expense
   Average
Rates
Earned/Paid
 

ASSETS

              

Loans, including fees

   $ 311,175      $ 4,790    6.11   $ 253,031      $ 4,183    6.56

Federal funds sold

     16,184        10    0.25     58        —      —     

Securities

     56,288        562    3.96     39,776        530    5.29

Federal agency equities

     2,198        3    0.54     1,943        11    2.25

CBB equity

     116        —      —          56        —      —     
                                          

Total earning assets

     385,961        5,365    5.51     294,864        4,724    6.36

Allowance for loan losses

     (3,247          (2,278     

Non-earning assets

     34,640             17,985        
                          

Total assets

   $ 417,354           $ 310,571        
                          

LIABILITIES AND STOCKHOLDERS’ EQUITY

              

Deposits

              

Demand interest bearing

   $ 44,403      $ 126    1.13   $ 35,667      $ 36    1.51

Savings

     169,008        1,211    2.84     54,694        375    2.72

Time deposits

     96,650        812    3.33     118,292        1,237    4.15
                                          

Total interest bearing deposits

     310,061        2,149    2.75     208,653        1,748    3.32

Other borrowed funds

              

Fed funds purchased

     —          —      —          3,722        25    2.66

Repurchase agreements

     12,314        45    1.45     16,401        104    2.52

Other borrowings

     20,000        144    2.86     21,000        150    2.83

Capital Notes

     7,000        105    6.00     —          —      —     
                                          

Total interest-bearing liabilities

     349,375        2,443    2.77     249,776        2,027    3.22

Non-interest bearing deposits

     42,483             35,627        

Other liabilities

     422             616        
                          

Total liabilities

     392,280             286,019        

Stockholders’ equity

     25,074             24,552        
                          

Total liabilities and

              

Stockholders equity

   $ 417,354           $ 310,571        
                          

Net interest earnings

     $ 2,922        $ 2,697   
                      

Net interest margin

        3.00        3.63
                      

Interest spread

        2.74        3.14
                      

 

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Net Interest Margin Analysis

Average Balance Sheets

For the Nine Months Ended September 30, 2009 and 2008

 

     2009     2008  
     Average
Balance
Sheet
    Interest
Income/
Expense
   Average
Rates
Earned/Paid
    Average
Balance
Sheet
    Interest
Income/
Expense
   Average
Rates
Earned/Paid
 

ASSETS

              

Loans, including fees

   $ 298,043      $ 13,448    6.03   $ 240,430      $ 12,408    6.90

Federal funds sold

     12,829        20    0.21     965        18    2.49

Securities

     46,181        1,479    4.28     35,113        1,419    5.40

Federal agency equities

     2,099        20    1.27     1,674        56    4.47

CBB equity

     116        —      —          56        —      —     
                                          

Total earning assets

     359,268        14,967    5.57     278,238        13,901    6.68

Allowance for loan losses

     (3,073          (2,243     

Non-earning assets

     31,949             16,592        
                          

Total assets

   $ 388,144           $ 292,587        
                          

LIABILITIES AND STOCKHOLDERS’ EQUITY

              

Deposits

              

Demand interest bearing

   $ 44,852      $ 378    1.13   $ 39,793      $ 486    1.63

Savings

     139,785        2,975    2.85     33,187        613    2.47

Time deposits

     98,627        2,601    3.53     127,663        4,249    4.45
                                          

Total interest bearing deposits

     283,264        5,954    2.81     200,643        5,348    3.56

Other borrowed funds

              

Fed funds purchased

     —          —      0.00     2,846        74    3.48

Repurchase agreements

     12,797        151    1.58     13,521        253    2.50

Other borrowings

     20,381        434    2.85     15,868        335    2.82

Capital Notes

     4,676        208    5.95     —          —      —     
                                          

Total interest-bearing liabilities

     321,118        6,747    2.81     232,878        6,010    3.45

Non-interest bearing deposits

     39,495             34,542        

Other liabilities

     2,636             673        
                          

Total liabilities

     363,249             268,093        

Stockholders’ equity

     24,895             24,494        
                          

Total liabilities and Stockholders equity

   $ 388,144           $ 292,587        
                          

Net interest earnings

     $ 8,220        $ 7,891   
                      

Net interest margin

        3.06        3.79
                      

Interest spread

        2.76        3.23
                      

 

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Table of Contents
Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

 

Item 4. Controls and Procedures

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Financial’s management, including Financial’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, Financial’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that Financial files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

There have been no significant changes during the quarter ended September 30, 2009, in the Company’s internal controls over financial reporting (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) or in other factors that could have significantly affected those controls subsequent to the date of our most recent evaluation of internal controls over financial reporting, including any corrective actions with regard to significant deficiencies and material weaknesses.

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

The Bank is not involved in any pending legal proceedings at this time, other than routine litigation incidental to its business.

 

Item 1A. Risk Factors

There have been no material changes from the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, as filed with the SEC on March 26, 2009.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

 

Item 3. Defaults Upon Senior Securities

Not applicable

 

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable.

 

Item 5. Other Information

Not applicable.

 

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Item 6. Exhibits

The following are filed as Exhibits to this Form 10-Q:

 

Exhibit

No.

  

Description of Exhibit

31.1    Certification of Robert R. Chapman III Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 13, 2009
31.2    Certification of J. Todd Scruggs Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 13, 2009
32    Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002, dated November 13, 2009

 

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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  BANK OF THE JAMES FINANCIAL GROUP, INC.
Date: November 13, 2009   By   /S/    ROBERT R. CHAPMAN III        
    Robert R. Chapman III, President
    (Principal Executive Officer)
Date: November 13, 2009   By   /S/    J. TODD SCRUGGS        
    J. Todd Scruggs, Secretary and Treasurer
    (Principal Financial Officer and Principal Accounting Officer)

 

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Index of Exhibits

 

Exhibit
No.

  

Description of Exhibit

31.1    Certification of Robert R. Chapman III Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 13, 2009
31.2    Certification of J. Todd Scruggs Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 13, 2009
32    Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002, dated November 13, 2009

 

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